Not only is the real rate of GDP growth less than what the data suggest, it is also likely to fall in the coming quarters.
The finance minister recently said that the latest data showing a reversal of the declining trend in GDP reflects that “the impact of demonetisation and GST (Goods and Services Tax) is behind us”. Two points arise here. First, the finance minister had argued for long that there was no adverse impact of demonetisation, so now we have an admission that there was indeed an adverse impact. Second, is it likely that this statement of the finance minister may also be incorrect.
The argument for reversal is based on quarterly data. But since that does not contain the data for the entire economy, it reveals only a partial picture, which could be misleading. The full data is available with a considerable time lag and even when it comes, it is usually revised several times. Consider the budgetary data as an example. The budget consists of the estimates, revised estimates, actual estimates one, then actual estimates two and so on, so it takes over three years for it to be finalised. The government data is the most systematic and reliable in the economy and yet it is not final for several years after the year ends.
India has a large unorganised sector – 93% of total employment and 45% of total output. Data for this sector is not available in the routine because it is dispersed across the length and breadth of the country in tens of millions of small and cottage units which do not report their data to any agency. The largest component of the unorganised sector is agriculture constituting 45% of the workforce and 14% of the total output of the economy. Data for agriculture is collected for each of the growing seasons and becomes available with a short time lag, but it is not collected for each quarter.
The non-agriculture part of the unorganised sector constitutes 48% of the workforce and 31% of the total output. It is the data for this part that is not available for some years. The government carries out surveys periodically for each component of the unorganised sector, like trade, manufacturing and finance. Thus, this data is not available either for each quarter or for each year.
So how are these sectors accounted for in the GDP figures, whether quarterly or annually? In the year the government carries out the survey for some component of the unorganised sector (say, transport), it takes a ratio of this figure with that of the corresponding component of the organised sector. It is then assumed that this ratio in the reference year remains the same for the intervening years till the next survey is carried out. The data from the organised sector is thus effectively used to calculate the contribution from the unorganised sector. Effectively then the rate of growth of the organised sector more or less becomes the growth rate of the unorganised sector. This may be alright if there is no shock to the economy. A shock to the economy typically effects the organised and the unorganised components differently so that the ratio calculated in the reference year becomes invalid. Thus, the organised sector can not any more represent the state of affairs in the unorganised sector.
So for the period after November 8, 2016, due to the two shocks – demonetisation and GST – the ratio calculated earlier was no longer valid. Fresh surveys were required to capture the impact. Since no surveys were carried out either post November 8, 2016 nor after July 1, 2017, one can safely argue that the data used for quarterly growth of the economy is not capturing the shock experienced by the unorganised sector. A rough calculation based on scattered evidence suggests that the current rate of growth of the economy is less than 1% and not 6.3%.
The data can be interpreted as showing an acceleration in the organised sector from 5.7% in the first quarter to 6.3% in the second quarter. Here also there is a catch. Quarterly data is provisional and is revised later. This revision is likely to be downward given the deep impact of GST in the second quarter. The first quarter was pre-GST and it impacted production in June when companies were trying to get rid of their stocks. However, in the July to September quarter, the full impact of GST was felt with all the confusion about tax rates, application of reverse charge, crediting of input taxes and so on. Rates were brought down and clarity came only by October.
Another reason why the actual rate of growth is lower than 6.3% is because the implementation of GST raised service prices the most but that is only partly captured in the price indices. So the real rate of growth is less than what the data suggests. No wonder then that major sections of the population are protesting.
Further, if there was any uptick in the economy, it is due to the high fiscal deficit in the budget. In the first six months itself it has become over 90% of the full year deficit. The implication is that the deficit is now running at about 6% of GDP instead of the targeted 3.2% and is generating excess demand. This has moderated the steep slide that would have otherwise followed the GST implementation.
The flip side of this steep rise in the deficit is that if the government wishes to achieve the fiscal deficit target by end March 2018, it would need to have zero deficit from now onwards. In other words, the demand from government accounts would fall sharply and this would lower the rate of growth in the next quarter given the lack of buoyancy in private sector demand and exports.
In brief, not only is the rate of growth of the economy not capturing the situation on the ground, it is likely to be revised downward later on and also is likely to fall in the coming quarters.
Arun Kumar is Malcolm Adiseshiah Chair Professor at the Institute of Social Sciences, and author of Demonetization and the Black Economy, Penguin (India).